RUTH SUNDERLAND: Pricking the Bitcoin bubble

Opinion over Bitcoin, the virtual currency, has been divided since the phenomenon began in 2008.

Enthusiasts believe it is a brave new currency for the online age, a way of freeing society from the stranglehold of a corrupt and dangerous banking system.

Critics see it as an unregulated haven for money-launderers and thieves, who rub shoulders with geeks and the gullible on the Bitcoin exchanges.
Sceptics had the upper hand yesterday when one of the biggest exchanges, MtGox, suspended operations after ‘unusual activity’.

Bitcoins: Their price shot through the thousand dollar barrier late last year but is now around half that

Bitcoins, whose price shot through the thousand dollar barrier late last year, are now trading at around half that.

It is not surprising that interest in the virtual currency took off in the wake of the financial meltdown, which shook to the core trust in conventional banks and foreign exchanges.

Some view a virtual currency as a natural progression from the electronic cash and contactless payments promoted by the big banks, that now want us all to carry out transactions by smart phone so they can shut hundreds of branches.

One might even argue that ‘mining’ for Bitcoins by solving cryptographic puzzles is no worse than central banks creating billions of pounds or dollars at the press of a button through QE.

The difference is that with Bitcoin, there is no regulation, no deposit protection insurance for holders and no lender of last resort.
The system we have proved inadequate, but it is better than nothing.

Fair shares

Welcome back to the Wider Share Ownership Council.The organisation, which does what it says on the tin, fell by the wayside when Lady Thatcher’s dream of a shareholding democracy started to fade. Now it is being reincarnated on a wave of fresh interest sparked by the under-priced Royal Mail float - and not before time.

Wider share ownership is an important cause.
Not only would it help solve the savings and pensions crisis, but private investors could also be a powerful force for better governance at UK companies. They tend to be looking for long-term returns and they are not afflicted with City group-think.

One only need attend a bank annual general meeting to see that it is the small shareholders who rise to their feet to question directors about outsize bonuses, poor dividends and other shortcomings.
Nine times out of ten, the heavy brigade of City institutions fail to put up a fight.

Another task the revived council could take on is to defend small retail brokers and investors against malign measures brewed up by the European Union.

Whatever one’s political views on the EU, the reality is that the UK’s influence over Brussels rulings on the financial sector does not reflect its importance to this country’s economy.
As a result, absurdities such as the banker bonus cap, which will have a hugely disproportionate effect in the UK, are bulldozered through.

Retail stockbrokers and wealth managers, who were not to blame for the financial crisis, are caught in the net of rules that have come in its aftermath, as in the end are their clients.
The problem with Brussels regulations and directives, particularly in the already complex area of financial services, is that the tedium defies contemplation.

Few can face the mental torment. But retail broking firms have to face it, for fear of being dragged into regimes designed for big institutions or for the ‘bancassurance’ model common on the continent.
Firms report that between 10 and 20 per cent of turnover is typically spent on complying with regulation, much of it from the EU. That can’t help the cause of a share-owning democracy.

GKN accelerates

Possibly the only people capable of competing with the EU at making up peculiar rules are the accounting standard-setters.

The latest case in point is engineering firm GKN, whose official pre-tax profit fell 15 per cent to £484million. The apparent dive was largely due to the fact it has to ‘mark to market’ its foreign exchange hedging contracts, in other words, put a snapshot price on them.

This rule has been causing major swings in the results at GKN and other industrial giants.
Large manufacturers are forced to account for hedging products – which they quite legitimately take out to protect their export earnings from the vagaries of currency rates – as if they were banks playing the derivatives markets.

It is true that some non-financial firms have in the past lost heavily on their hedging strategies, but GKN’s dividend is up 10 per cent, free cash flow is up 54 per cent, sales are up 10 per cent and underlying profit, without the hedging, is up 17 per cent. In the real world, its numbers went in the right direction.